Ask A Trust Officer

Dear Trust Officer:
I’ve heard that there may be a cloud over the tax advantages of 529 plans. What’s that all about?
—College Funder

Dear Funder:
There was a momentary cloud over 529 plans, but it has evaporated.

In his State of the Union address, President Obama did call for an end to the tax freedom for distributions from 529 plans for college expenses. The President essentially proposed going back to the pre-2001 rules for these programs, which allowed for tax-deferred growth but full income taxes on all withdrawals. The new rules would only have applied to future contributions. The justification for the change was that the tax benefits of 529 plans have been flowing disproportionately to higher-income taxpayers, given that they have the highest marginal tax rates. Reducing that benefit for them would allow for expansion of the tax credits that have greater value to lower-income families.

After a bipartisan outcry, the President backed off the proposal. His spokesman said that it had become a “distraction.” The House then responded by voting to somewhat expand the benefits of 529 plans. By a bipartisan vote of 401–20, House Resolution 529 was approved, which would:

Modernize 529 plans by adding computers to the list of qualified expenses;

Allow funds to be re-deposited without taxes or penalties if a student withdraws early for medical reasons and obtains a refund from the school; and

Remove unnecessary paperwork burdens that date back to before withdrawals from 529 plans became tax free.

Given this kind of political support, I think we can be confident that there won’t be any impairment of 529 plans any time soon. The Obama administration has not threatened to veto the House bill should it clear the Senate, although the administration continues to call for additional changes that may target more benefits to lower-income families.

Do you have a question concerning wealth management or trusts? Send your inquiry to Adam Cox, JD, MBA.